Concept explainers
1.
Compute the total estimated gross profit on the contracts.
1.
Explanation of Solution
Contract:
Contract is an agreement among two parties or more parties which includes enforceable obligations and rights. A contract can be written, oral or implied by ordinary business practices.
Calculate the total estimated gross profit:
As of December 31 | |||
2019 | 2020 | 2021 | |
Contract Price | $20,000,000 | $20,000,000 | $20,000,000 |
Costs incurred to date | $8,000,000 | $16,000,000 | $18,000,000 |
Estimated costs to complete | $6,000,000 | $3,000,000 | $0 |
Total costs estimated to date | $14,000,000 | $19,000,000 | $18,000,000 |
Estimated gross profit | $6,000,000 | $1,000,000 | $2,000,000 |
Table (1)
2.
Compute the percentage of completion for 2019, 2020 and 2021.
2.
Explanation of Solution
Compute the percentage of completion for 2019:
Therefore, the percentage of completion for 2019 is 57.1%.
Compute the percentage of completion for 2020:
Therefore, the percentage of completion for 2020 is 84.2%.
Compute the percentage of completion for 2021:
Therefore, the percentage of completion for 2021 is 100%.
3.
Compute the percentage of completion for 2019, 2020 and 2021.
3.
Explanation of Solution
Compute the amount of income recognized for 2019:
Therefore, the amount of income recognized during 2019 is $3,426,000.
Compute the amount of income recognized for 2020:
Therefore, the amount of income recognized during 2020 is ($2,584,000).
Compute the amount of income recognized for 2021:
Therefore, the amount of income recognized during 2021 is $1,158,000.
4.
Journalize entries related to the project for 3 years.
4.
Explanation of Solution
Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Accounting rules for Journal entries:
- To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
- To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.
Prepare journal entries:
Date | Account titles and explanation | Debit ($) | Credit ($) |
2019 | Construction in progress (inventory) | 8,000,000 | |
Accounts payable, cash, salaries, payables etc. | 8,000,000 | ||
(To record costs of construction) | |||
Construction expense | 8,000,000 | ||
Construction in progress (Refer to requirement 3) | 3,426,000 | ||
Construction revenue | 11,426,000 | ||
(To record gross profit) | |||
8,000,000 | |||
Partial billings | 8,000,000 | ||
To record partial billings) | |||
Cash | 6,000,000 | ||
Accounts receivable | 6,000,000 | ||
(To record collections) | |||
2020 | Construction in progress (inventory) | 8,000,000 | |
Accounts payable, cash, salaries, payables etc. | 8,000,000 | ||
(To record costs of construction) | |||
Construction expense | 8,000,000 | ||
Construction in progress (Refer to requirement 3) | 2,584,000 | ||
Construction revenue | 5,416,000 | ||
(To record gross profit) | |||
Accounts receivable | 8,000,000 | ||
Partial billings | 8,000,000 | ||
To record partial billings) | |||
Cash | 6,000,000 | ||
Accounts receivable | 6,000,000 | ||
(To record collections) | |||
2021 | Construction in progress (inventory) | 2,000,000 | |
Accounts payable, cash, salaries, payables etc. | 2,000,000 | ||
(To record costs of construction) | |||
Construction expense | 2,000,000 | ||
Construction in progress (Refer to requirement 3) | 1,158,000 | ||
Construction revenue | 3,158,000 | ||
(To record gross profit) | |||
Accounts receivable | 4,000,000 | ||
Partial billings | 4,000,000 | ||
To record partial billings) | |||
Cash | 6,000,000 | ||
Accounts receivable | 6,000,000 | ||
(To record collections) | |||
Partial billings | 20,000,000 | ||
Construction in progress | 20,000,000 | ||
(To record and to close partial billings) |
Table (2)
5.
Explain the manner in which the project will be carried on the balance sheet for 2019, 2020 and 2021.
5.
Explanation of Solution
The manner in which the project is carried on the balance sheet for the year 2019, 2020 and 2021 is explained below:
As of December 31, | |||
Current assets | 2019 | 2020 | 2021 |
Accounts receivable | $2,000,000 | $4,000,000 | $2,000,000 |
Construction in progress | $11,426,000 | $16,842,000 | |
Less: Partial billings | $8,000,000 | $16,000,000 | |
Construction in progress in excess of billings | $3,426,000 | $842,000 |
Table (3)
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Chapter 17 Solutions
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